Singapore Transfer Pricing Update – IRAS’ Indicative margins for related party loan updated for 2021 and 2022

Inland Revenue Authority of Singapore (“IRAS”) has introduced the indicative margins for related party loans since 2017 whereby an indicative interest rate is published at the beginning of each calendar year. The indicative margins (also known as indicative interest rates for intercompany loan) is a market interest rate recommended by IRAS to be adopted by Singapore Taxpayers for related party loans not exceeding S$15 million. The indicative interest rate is added to a base rate to set an all-in interest rate.

From 1 January 2022 the indicative interest rate publish by IRAS will no longer be added to Interbank Offered Rates (“IBORs”) such as the Singapore Inter Bank Offered Rate (“SIBOR”) or the London Inter Bank Offered Rate (“LIBOR”) as IBORs will be phase out in 2022.  

IRAS indicative interest rate will be added to risk free rates (RFRs) such as Singapore Overnight Rate Average (“SORA”), Secured Overnight Financing Rate (“SOFR”), Sterling Overnight Index Average (“SONIA”) that will replace the IBORs.

• Singapore Taxpayers cannot longer use IBORs as a base rate if they opt to use the indicative interest rates published by IRAS.
• If a taxpayer enters into an intercompany loan and it sets the interest rate using IBORs plus indicative interest rates, it will be required to perform a complete TP Analysis as IRAS indicative margin rate should be added to risk free rates only.
• It is also important to note the significant decline in the indicative margin rate from 2021 to 2022. The indicative interest rate for 2021 was 2.75% vs 1.80% in 2022. Therefore, any contracts with revolving clauses should consider the lower interest rate for 2022.

Table 1 below reflects the indicative margin for related party loans obtained or provided during 2022 that should be added to the new base reference rates i.e., RFRs.

Table 1: Base reference rates for RFRs

Table 2 below reflects indicative margins for related party loans obtained or provided prior to 2022 where the base reference rates are IBORs (updated for 2021 margins).

Table 2: Base reference rates for IBORs

Transition of legacy related party IBOR loans to RFR loans

It is recommended that all legacy related party IBOR loans be converted to RFR loans before IBOR’s are decommissioned. Guidance for the relevant IBOR/RFR pairs are issued by the relevant governing bodies.

IRAS’ indicative margin is not mandatory

The indicative margins above are an alternative to performing a detailed transfer pricing analysis for determining the arm’s length interest rates and it is not mandatory.

The following example illustrates how Taxpayers can use the indicative interest rate for intercompany loans.